Bricks and Mortgages

Are you planning to buy a home in France this year?  Fiona Watts from International Private Finance explains why it’s a good time to consider financing your purchase with a French mortgage

For those of you looking into the financing of French property purchase in 2018, there are a number of reasons why a French mortgage may be the best option available to you.   Mortgage rates in France are near their record lows, meaning that banks are pricing credit at attractively cheap levels.  As always with financial matters, however, there are a number of different factors to bear in mind when choosing your mortgage product.

UK AND FRENCH ECONOMY

On 2 November, the Bank of England announced the first UK interest rate rise in 10 years.  The official bank rate was increased from 0.25% to 0.50%, a significant landmark in the continued recovery of the UK economy following the global recession of 2008.

The expectation is that the European Central Bank (ECB) is soon to follow suit.  The rate hike in the UK is just the latest of a number of factors that suggest that interest rates in Europe will soon be on the rise.  Another of these was Emmanuel Macon’s appointment as France’s new president back in May 2017.  The young president has made it clear that his priority is the health of the French economy, which remains Europe’s third largest in terms of GDP.  This has reassured financial markets and has served to remove the uncertainty that had been building towards the end of François Hollande’s regime.

With the Eurozone economy on the up, speculation is mounting as to when the ECB will reduce its quantitative easing programme and start raising interest rates.  This is the key question right now for anyone looking to take out a French mortgage, and it is one that has led to some noteworthy developments within the lending departments of French banks.

Despite the prospect of the imminent rate rises, some French banks cut their short-term fixed mortgage rates for non-resident buyers during 2017.  However, while shorter term fixed rates may have been reduced, longer term fixed French mortgage rates started to creep upwards towards the end of the year.  This move is perfectly in keeping with forecasts for interest rate hikes in the medium to long term as discussed above.

The sense is therefore that French banks are still happy to offer attractively low rates in the short term, but are already taking steps to account for the expected future rate increases.

MANAGING EXCHANGE RATES

Another thing that British buyers considering the purchase of a French property will have been keeping a close eye on is the euro/sterling exchange rate.  Since the Brexit referendum in June 2016, the relationship between the two currencies has been particularly volatile, with sterling tending to weaken against the euro.  For many, taking out an affordable French mortgage has proved to be a very effective way of protecting against the need to transfer a large amount of savings into euros at unfavourable post-referendum exchange rates.

There is a wealth of flexible mortgage products available for British buyers in France.  Variable rate mortgages have tended to be the preferred option for buyers who hope that the pound will once more strengthen against the euro over coming years.  As and when the pound recovers, a variable rate mortgage with no early redemption penalties will allow the British borrower to purchase euros at a more favourable rate and use them to pay off a chunk – if not the remaining balance – of the outstanding capital.  This option has proved particularly popular over the last few years because of the low French mortgage rates.

However, this desire for flexibility in your mortgage also needs to be balanced against the expectation that rates will soon be increasing in France.  Variable rate mortgages offer the comfort of being able to pay off large parts of the outstanding capital without being penalised, but they may seem a risky option in the current climate of economic growth.

PROTECTION AGAINST RATE HIKES

For those of you who are seeking more protection against any forthcoming rate hikes, there are two main types of French mortgages available: capped and fixed rate products.  The most popular option among British buyers tends to be to take out a fixed-rate French mortgage.  This is very commonplace among local property buyers, and a large proportion of the mortgages taken out in France are fixed for between 20 and 30 years.

Buyers from abroad are often pleasantly surprised at the low fixed-rate mortgages available in France, and more than ever with the historically low rates that are widely available right now.

However, French fixed-rate mortgages do also tend to be very restrictive.  Banks invariably charge an early redemption penalty for overpayments made on fixed-rate mortgages.  As a result, what mortgages gain in security from these mortgages, they tend to lose in terms of flexibility.

The typical early redemption penalty charged by French banks is six months’ interest or 3% of the outstanding capital on your mortgage.

Nevertheless, there is another option available if you wish to protect yourself against rate increases while retaining more flexibility for overpayments: the capped rate mortgage.  These products offer the flexibility of a variable rate, but retain some of the security of a fixed rate.  The French mortgage rate may rise and fall, but early redemption penalties tend not to apply and the rate is ‘capped’ at a certain level – usually between 1.00 – 1.50% above the starting rate – for a period of seven to 13 years.  This type of mortgage is still relatively new to the French market, and has proved popular among borrowers seeking a happy medium between the variable and the fixed rate.

When considering protecting yourself against rate increases, it is also important to note that the behaviour of French variable and fixed rates differs when compared with mortgages in the UK.  If the base rate rises, this does not automatically mean that the borrower’s monthly payments will rise, instead, the bank adjusts the overall length of your mortgage term.

In other words, a drop in interest rates will result in a shorter term, while a rate rise will see the overall term extended.  Meanwhile, the monthly payments on your mortgage in France will remain the same.  This system is favoured by borrowers and lenders alike in France, as it allows borrowers to budget more effectively for the monthly cost of their French mortgage and reduces the risk of missed payments.

CONTROLS AND REGULATIONS

As you can appreciate from the points discussed already, there are many factors to consider when taking out a mortgage in France at the moment.  The process of applying for a French mortgage is also becoming more strictly regulated, with the implementation of a body of legislation known as the European Mortgage Credit Directive (EMCD).

Designed to guarantee better protection for consumers, the EMCD is obliging banks to tighten their lending criteria and internal procedures in order to ensure that they are compliant.  Yet although its aim is to protect borrowers, the increased documentation required places a greater burden on the banks and the subsequent delays can be frustrating for clients taking out a French mortgage.

For both parties, it therefore makes sense for the borrower to employ the services of a specialist French mortgage broker.  The broker is able to pre-assess a mortgage application and to ensure that it meets the new criteria, in terms both of its financial strength and of the supporting documentation that is now required by law.  A reputable French mortgage broker will also be able to assess your particular mortgage requirements and help you to choose the product that best suits your personal circumstances. With changes expected in the short term affecting both interest rates and the euro/sterling exchange rate, there has never been a more important time to make sure that you choose the right mortgage.

Fiona Watts is joint managing director of International Private Finance internationalprivatefinance.com.  

This article first appeared in the February 2018 edition of Living France Magazine